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CVR Partners Offers At Least A 10% Yield With A Good Possibility Of Future Increases

CVR Partners has entered a merger agreement with Rentech Nitrogen.

This merger, when completed, should offer a double digit increase in payments to shareholders.

While the company's payments each quarter vary greatly, the payments over the course of a year are relatively steady and reliable.

UAN is the symbol for CVR Partners LP and also the symbol for the product it manufactures and distributes; urea ammonium nitrate which is used in the production of nitrogen fertilizers. On 9/14/15 Zachs Equity Research issued a new strong buy on this issue and since this stock is in several of my accounts, I decided to review what is happening at the company.

The company's plant is located in Coffeyville, Kansas and produces about 5% of the total urea ammonium nitrate demand in the United States. The plant also produces ammonia which it sells on the open market. Last month the company announced a merger agreement with Rentech Nitrogen (NYSE:RNF) where CVR Partners will acquire all Rentech's outstanding units. This combination does not include the Pasadena plant which will remain with Rentech's unit holders or be sold. Once the merger is complete, CVR Partners will be the 2nd largest producer of urea ammonium nitrate in the US.

Managements of both companies see the combination benefiting unit holders by larger scale, diversification of plants, feedstocks and markets, and reduced costs. Both plants are located in the Midwest corn-belt, close to where their fertilizer products are sold. The merger will create a larger footprint and offer a greater variety of products which should benefit both producer and consumer. In addition this merger will allow opposite year plant turnarounds which should reduce earnings volatility. CVR Partners expects this transaction to be double-digit accretive to distributable cash per unit even before synergies. Management expects synergies to realize at least $12 million in cost savings from the merger as well. The target date to complete the merger is the end of the year. The company offered the illustration below on the benefits of the merger.

Source: Merger Announcement Presentation 8/10/15

CVR Partners currently has a policy of distributing all available cash the company generates each quarter as determined by the board of directors. The board of directors of the general partner reserves the right to change the distribution policy at any time. The cash distribution history of the company is shown below:

Source: CVR Partners Web Site (Distribution information)

The chart shows that distributions vary greatly from quarter to quarter. Assuming the merger goes through, this variation should be reduced somewhat since plant shutdowns will alternate. Here is a company that is selling for around $11.00 per share that paid shareholders $1.52 over the past 4 quarters. Even if things were to go poorly and the distributions were to drop to $1.10 a year, the company would still be offering a 10% yield. There appears to be an excellent chance that the company will pay quite a bit more than $1.10 over the next 4 quarters especially if the merger is completed in quick order.

There is no question that the company provides an important product at the right price. Unless there is a major problem, the company appears to be in an excellent position to continue to offer investors a good quarterly distribution. While the company is not in a position to grow quickly, it does offer a steady reliable return even despite the variations quarter by quarter.


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